August 12, 2010

Inequality in Latin America

Some time ago I took a dig at uncritical supporters of Hugo Chavez, arguing on the basis of a chart from VoxEU, that Chavez was a relative under-performer when it came to reducing inequality.

My certainty on such a claim was shaken by this post at Duncan Green’s blog, which seemed to show the opposite, that Venezuela was doing particularly well at reducing inequality. Green then argued that, say what you might about Chavez, he should be given some credit for his achievements in this area.

Was I wrong?

The first thing I noticed was that Duncan’s post was based on data that spanned from 1990 to 2008. Possibly, I thought, he was giving Chavez credit for inequality which had declined before his time in power. Nevertheless, in penance for my original smearing of the Great Socialist Hope, I decided to devote an afternoon up to my arms in World Bank data to see what was actually going on with inequality in Latin America.

In a moment, I’ll tell you what I found, but first, let’s recap: what’s actually wrong with inequality?

First, everything else being equal, inequality is bad simply because, for any given level of national income, a more unequal country will do a worse job in lifting it’s people out of poverty than a more egalitarian country on the same income level. Of course everything else isn’t equal and a key way that people are lifted out of poverty is through economic growth (growing national income effectively). And it’s always possible that higher inequality might be more conducive to higher growth and, over time this will lead to lower levels of absolute poverty in poorer countries.

However, there’s also some pretty good research to suggest that high levels of inequality actually undermine economic growth. Seminal papers by Engerman and Sokoloff (see here and here) as well as research by William Easterly, point to this being the case. Of course, this doesn’t mean that absolute equality will be optimal for growth or that all attempts to reduce inequality will help growth. However, the evidence does seem to show that high inequality is not good for economic development.

On top of that, there is evidence best summarised by Richard Wilkinson in his book The Impact of Inequality (which is more statistically rigorous, albeit duller, than his other book Spirit Level) to suggest that more unequal societies are beset by all manner of problems including worse crime, lower levels of trust, and worse health outcomes. Wilkinson’s work is most emphatically not beyond critique (as David Runciman points out he’s stretching it a bit to suggest everyone will be worse off in unequal countries; while Claude S Fischer offers excellent critique in the Boston Review). Quite possibly the biggest flaw is that Wilkinson does not, from my recollection, convincingly cover for omitted variables in his analysis – for example: perhaps it’s poor governance that causes countries to both be less trusting and more unequal. Inequality might merely be an effect not a cause. Nevertheless, there remains enough evidence in Wilkinson’s work to at least plausibly suggest that high inequality leads directly to social harm.

Finally, if you’re not a Consequentialist you might also object to high levels of inequality because they seem patently unjust.

To me, the above reasons are, one way or other, good cause to think that reducing inequality (so long as you don’t resort to draconian measures or ransack your economy to do so) is a good thing. So, has anyone being doing this in Latin America?

First, let’s show the obvious: Latin America is a very unequal part of the World (all inequality information in the following charts is in the form of a Gini Index (Gini coefficient * 100)). All numbers come from World Bank data, except those numbers for Sweden, the UK, the USA, and Australia, which come from the CIA World Fact Book; and the figure for New Zealand, which is from New Zealand’s ministry of social development. Please bear in mind that there are other ways of measuring inequality (such as decile ratios) which might return different results, and that my numbers here are only as good as their imperfect source data.

Inequality 2006 Selected Countries

The Latin American countries on the chart are all significantly more unequal than my selection of developed countries (the difference between Colombia and Sweden is staggering!), with the only exception being the USA, which actually (according to the CIA World Fact Book) was more unequal than Venezuela in 2006. However, it’s worth noting that, according to the OECD, the Gini index for the USA is actually 38, not 44. If this is right, then the US remains more equal than Venezuela.

So much for today’s figures, what about trends.

Inequality Selected Latin American Countries 1980 to 2006

That’s quite a ride for a number of the Latin American Nations. For simplicity’s sake let’s look at more recent years.

Inequality in Selected Latin American Countries 1990 to 2006/7

A few interesting points to notice: Brazil has seen a steady decrease in inequality since democractisation, with good progress in the Lula years. It’s to early to really tell the impact of Morales in Bolivia and Correra in Equador (although it seems positive for Morales). In general in the countries on this graph at least the current millennium has been one characterised by falling inequality, with the big exception being Columbia.

And as for Chavez, yes, he has presided over a good fall in inequality (the change in trend may have predated him perhaps but he deserves credit). That 2005/2006 change is especially impressive, assuming it’s correct and that it’s not just the result of the wealthy freeing the country. Quite possibly the VoxEU chart that I linked to didn’t have 06 info in it, which might explain Venezuela’s poor performance in it.

Finally, two charts showing change as columns, the first from 1990 (or closest year) to 2006 (or closest year), the second from 2000 (or closest year) to 2006 (or closest year).

Change in Inequality Selected Latin American Countries 1990 to 2006

Change in Inequality Selected Countries 2000-2006

To conclude: from the numbers I have, Chavez seems to have done a pretty good job in reducing inequality in Venezuela. I think a lot of what he is doing is very questionable, but in this area at least the results to-date fall in his favour. As, it should be said, do they fall for a number of left-wing reforming regimes in Latin America, such as those in Chile and Brazil over the time studied.

Thanks for this, Terence, really interesting and great graphs! It occurs to me that, Venezuela aside, the general order of countries from most to least unequal more or less reflect the extent and success of land reform: i.e. from Costa Rica (pretty much all small farmers from the Conquest), Mexico (extensive land reform post Mexican revolution), Peru (somewhat bungled but serious land reform programme 1968-75, not subsequently reversed), Nicaragua, Guatemala and Chile (land reform reversed in counter-revolutions), to Brazil (never had large scale land reform). Make of that what you will…

A success in land reform explanation would probably fit quite well with the Sokoloff and Engerman explanation of the impact of inequality. I reckon the key question would be the order of the causal chain. i.e. is it:

Land Inequality –> Political Inequality –> Economic Inequality
or
Political Inequality –> Land Inequality (failure of reforms) –> Economic Inequality
or
Economic Inequality –> Political Inequality (failure of reforms) –> Land Inequality
or
Land Inequality –> Economic Inequality –> Political Inequality.

and so on.

Terence (ps good to hear from you too. Hope all is going well with travels and study.)

Cheers Terence. I should get around to reading Sokoloff and Engerman, somewhere amidst thesis-related stuff.

Re: the causal chain, well, my instinct is that the core Marxist perspective (it all comes back to who controls the means of production)has got a lot going for it, but I’m also inclined to some overdetermination and quite like the Cardoso & Faletto idea that changes in the system of production can generate possibilities for new alliances between classes and groups (i.e. politics matters).

But my concrete answer would be that it’s circular / mutually reinforcing, and really depends on what historical moment you’re looking at. For example, the fact that Costa Rica started its modern history as a nation of small holders has got to be a really important factor in its subsequent economic and political history. Meanwhile, the Peruvian agrarian reform (the result of an odd political turn, a military coup by generals who had been reading their structuralist and dependency theorists) wasn’t much of a success in terms of economic development, but did permanently end the hacienda system and landowner impunity, which I understand still exists in parts of Brazil. So it probably did have some effects which kind of filtered their way into the political and economic structures.